When the stock market was rallying earlier this year, IndexUniverse Analyst Ugo Egbunike noticed the rally rested almost entirely on the backs of the large-caps . Using Vanguard ETFs, he showed that the large-caps outperformed their smaller peers by about 7 percent over the 12 months ending April 2012.
Under normal market conditions, small-caps should outperform large-caps when the economy is doing well and underperform them when the economy is doing poorly.
Indeed, small-cap stock performance is generally a good indicator of economy strength, so the segment’s underperformance earlier this year was troubling.
Recently, however, small-caps have been keeping pace with—and even outperforming—their large-cap brethren as the stock market has rallied.
Over the past month, the Schwab U.S. Small-Cap ETF (SCHA) has returned almost double the performance of the Schwab U.S. Large-Cap ETF (SCHX), while the Schwab U.S. Mid-Cap ETF (SCHM) is in between the two.
Even when that time period is extended to cover the whole past year, the recent small-cap rally has allowed small-caps to hold their own.
Whether the market continues to rally, it’s good to see small-caps acting like small-caps again.
The Fed is meeting in just five days to discuss whether to further stimulate the U.S. economy—if you’re predicting good news, now might be a very good time to increase your small-cap allocation.
At the time this article was written, the author held a position in SCHA. Contact Carolyn Hill at firstname.lastname@example.org.
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